Federal Budget 2018
Date of effect | Current until 30 June 2019
The ability for small business entities to claim an immediate deduction for assets costing less than $20,000 has been extended until 30 June 2019. From 1 July 2019, the immediate deduction threshold will reduce back to $1,000.
There are no limits to the number of times you can use the immediate deduction assuming your cashflow supports the purchases. If your business is registered for GST, the cost of the asset needs to be less than $20,000 after the GST credits that can be claimed by the business have been subtracted from the purchase price. If your business is not registered for GST, it is the GST inclusive amount.
Second hand goods are also deductible, however, there are a number of assets that don't qualify for the instant asset write-off as they have their own set of rules. These include horticultural plants, capital works (building construction costs etc.), assets leased to another party on a depreciating asset lease, etc.
If you purchase assets costing $20,000 or more, the immediate deduction does not apply but small businesses have the ability to allocate the purchase to a pool and depreciate the pool at a rate of 15% in the first year and 30% for each year thereafter.
Date of effect | 1 July 2018
Applying to income years starting on or after 1 July 2018, the way the research and development (R&D) tax incentive applies will change to focus on 'more intensive' R&D activities, particularly in medical and clinical development. The changes attempt to refocus the incentive on activities that go well beyond what companies would normally do to improve.
Companies under $20m
For companies with an aggregated annual turnover less than $20 million:
- An annual $4 million cap will be introduced on cash refunds for R&D claimants. Amounts that are in excess of the cap will become a non-refundable tax offset and can be carried forward into future income years;
- Clinical trials will be excluded from the $4 million cap on cash refunds, to encourage development in this area; and
- The refundable R&D tax offset will be amended and will become a premium of 13.5 percentage points above the company's tax rate for that year.
Companies over $20m
For companies with aggregated annual turnover of $20 million or more, an R&D premium will be introduced that ties the rates of the non-refundable R&D tax offset to the incremental intensity of R&D expenditure as a proportion of total expenditure for the year. The marginal R&D premium will be the company's tax rate plus:
- 4 percentage points for R&D expenditure between 0% to 2% R&D intensity;
- 6.5 percentage points for R&D expenditure above 2% to 5% R&D intensity;
- 9 percentage points for R&D expenditure above 5% to 10% R&D intensity; and
- 12.5 percentage points for R&D expenditure above 10% R&D intensity.
The R&D expenditure threshold - the maximum amount of R&D expenditure eligible for concessional R&D tax offsets - will be increased from $100 million to $150 million per annum.
The ATO has expressed concerns in recent years that many claims are being made under the R&D tax incentive for expenditure that does not meet the strict conditions for the tax offset. For example, the ATO's view is that some companies have been claiming the R&D tax offset in connection with normal business activities rather than experiments being undertaken for the purpose of generating new knowledge. In addition to the changes outlined above, additional resources will be provided to the ATO and Department of Industry, Innovation and Science to undertake greater enforcement activity and provide more guidance for those seeking to make claims.
Date of effect | 1 July 2019
The taxable payments reporting system requires businesses in certain industries to report payments they make to contractors (individual and total for the year) to the ATO. 'Payment' means any form of consideration including non-cash benefits and constructive payments. From 1 July 2019 the following industries will be required to lodge annual reports to the ATO:
- security providers and investigation services;
- road freight transport; and
- computer system design and related services.
The building industry, cleaning and courier businesses are already required to provide this enhanced reporting to the ATO. The first annual report for these industries is required by August 2020. Businesses in these industries will need to start collecting information on payments to contractors from 1 July 2019.
Date of effect | 1 July 2019
The Government really wants employers focussed on their tax obligations to the point where employers that fall behind will lose the right to claim employment related tax deductions.
Employers who do not keep up with their PAYG obligations will not be able to claim a tax deduction for payments to employees (such as wages).
Businesses will also lose the ability to claim deductions for payments made to contractors where the contractor does not provide an ABN and the business does not withhold PAYG.
Date of effect | 1 July 2019
Significant global entities (SGE) face an increased level of compliance. From 1 July 2018, the definition of an SGE will be expanded.
In very broad terms, at present, an entity is an SGE if:
- It is the parent entity of a group with annual global income of $1bn or more; or
- It is a member of a group that includes a parent entity with annual global income of $1bn or more and the group is consolidated for accounting purposes as a single group.
These rules could potentially apply to Australian subsidiary companies or Australian branches of foreign companies, regardless of the turnover of the Australian operations. The definition of an SGE will be expanded from 1 July 2018 to include:
- members of large multinational groups headed by private companies, trusts and partnerships; and
- members of groups headed by investment entities.
If an entity is treated as an SGE then it could be exposed to:
- Increased penalties, including for situations where returns etc., are not lodged on time;
- Country-by-country reporting obligations; and
- The need to provide general purpose financial statements to the ATO if these have not already been provided to ASIC.
Date of effect | 1 July 2019
A limit of $10,000 will be introduced for cash payments made to businesses for goods and services from 1 July 2019. Payments above the threshold will need to be made through an electronic payment system or by cheque.
The measure does not impact on transactions with financial institutions or non-business consumer to consumer transactions. But, if you run a business, from 1 July 2019 you will not be able to accept cash transactions above $10,000.
Date of effect | 1 July 2019
The thin capitalisation rules are designed to place a limit on the level of interest and other debt deductions that can be claimed in Australia when Australian operations are heavily funded by debt rather than by equity. The thin capitalisation rules apply where total debt deductions (e.g., interest expenses) for the taxpayer and its associates exceeds $2 million.
These rules will be tightened by requiring entities to align the value of their assets for thin capitalisation purposes with the value included in their financial statements.
This measure will apply to income years commencing on or after 1 July 2019 and all entities must rely on the asset values contained in their financial statements for thin capitalisation purposes. Valuations made prior to 7.30PM (AEST) on 8 May 2018 may be relied on until the beginning of an entity's first income year commencing on or after 1 July 2019.
The Government will also ensure that foreign controlled Australian consolidated entities and multiple entry consolidated groups that control a foreign entity are treated as both outward and inward investment vehicles for thin capitalisation purposes. This will apply for income years commencing on or after 1 July 2019. This change will ensure that inbound investors cannot access tests that were only intended for outward investors.
Date of effect | From 7:30PM (AEST) on 8 May 2018
This measure seeks to close a loophole that provides access to the small business CGT concessions by partners in large partnerships.
Partners that alienate their income by creating, assigning or otherwise dealing in rights to the future income of a partnership (often referred to as Everett assignments) will no longer be able to access the small business capital gains tax (CGT) concessions in relation to these rights.
The small business CGT concessions assist owners of small businesses by providing relief from CGT on the disposal of assets related to their business. However, some taxpayers, including large partnerships, are able to access these concessions in relation to their assignment of a right to the future income of a partnership to an entity, without giving that entity any role in the partnership. Partly this is due to the fact that there is no minimum percentage interest that needs to be held by partners in a partnership to access these concessions, unlike the 20% threshold that normally applies to shareholders of a company or beneficiaries of a trust.
This has been an area of concern for the ATO for some time and in recent years the ATO has indicated that the general anti-avoidance rules can potentially apply to some of these arrangements. It appears that the Government has decided to simply take away some of the concessions in the tax system which make these arrangements attractive.
Date of effect | 1 July 2019
Unpaid present entitlements will come directly within the scope of Division 7A. An unpaid present entitlement arises where a trust appoints income to a corporate beneficiary but this amount has not actually been paid to the company. The measure seeks to ensure that the unpaid present entitlement is either required to be repaid to the private company over time as a complying loan or will be subject to tax as a dividend.
While Division 7A can currently apply to some arrangements involving unpaid present entitlements owed to companies, they are treated differently to loans and in some cases receive preferential treatment compared with loans. While the Government has not released much detail on this proposed change, presumably the changes will ensure that the treatment of unpaid present entitlements is more closely aligned with the current treatment of loans. However, we will have to wait and see whether the changes only apply to newly created entitlements or whether existing unpaid entitlements will be affected.
The Division 7A reforms announced in the previous budget have been delayed to include this latest measure as a consolidated package.
Date of effect | No date specified
Corporation and tax laws will be reformed in an attempt to target phoenix activity. The reforms:
- Introduce new phoenix offences to target those who conduct or facilitate illegal phoenixing;
- Extend the Director Penalty Regime to GST, luxury car tax and wine equalisation tax, making directors personally liable for the company's debts;
- Expand the ATO's power to retain refunds where there are outstanding tax lodgements;
- Prevent directors improperly backdating resignations to avoid liability or prosecution;
- Limit the ability of directors to resign when this would leave the company with no directors; and
- Restrict the ability of related creditors to vote on the appointment, removal or replacement of an external administrator.
The current Director Penalty Regime includes unpaid superannuation guarantee and PAYG withholding amounts but does not include GST liabilities. These proposed changes will ensure that directors become personally liable in situations where the company has not satisfied its GST obligations as well as luxury car tax and wine equalisation tax liabilities.
Date of effect | 1 July 2018 - thin capitalisation changes | 1 July 2019 - other measures
A package of measures has been introduced to address risks to the corporate tax base posed by stapled structures and similar arrangements. The package will also limit access to concessions for passive income utilised by foreign governments and foreign pension funds.
Stapled structures arise where two or more entities are commonly owned and bound together such that the interests in them cannot be bought or sold separately. At least one of the two entities is a trust.
The Government's concerns have been driven by findings that over recent years, a growing number of taxpayers have sought to re-characterise trading income into more favourably taxed passive income through the misuse of the managed investment trust (MIT) regime. When combined with existing concessions used by foreign pension funds and sovereign wealth funds, some foreign investors have been able to access tax rates of 15% or less (in some cases, almost tax-free), rather than the applicable corporate tax rate of 30% on Australian business income.
The key elements of the package are:
- Applying a final withholding tax set at the corporate tax rate to distributions derived from trading income that has been converted to passive income using a MIT (with a 15 year exemption for new, Government-approved nationally significant infrastructure assets);
- Amending the thin capitalisation rules to prevent foreign investors from using multiple layers of flow-through entities (i.e. trusts and partnerships) to convert their trading income into favourably taxed interest income;
- Limiting the foreign pension fund withholding tax exemption for interest and dividends to portfolio investments only;
- Creating a legislative framework for the existing tax exemption for foreign governments (including sovereign wealth funds), and limiting the exemption to passive income from portfolio investments; and
- Excluding agricultural land from being an 'eligible investment business' for a MIT.
Here's what's in the budget for:
This article is provided for information purposes only and correct at the time of publication. It should not be used in place of advice from your accountant. Please contact us on 02 9957 4033 to discuss your specific circumstances.